Securities
and Exchange Board of India
CIRCULAR
Cir/
IMD/ DF/13/ 2011
August
22, 2011
All
Registered Mutual Funds/ Approved Asset Management Companies (AMCs)
Sir/Madam,
Sub:
Circular for Mutual Funds
A.
Transaction charges
1.
Please refer to SEBI circular no. SEBI/IMD/CIR No. 4/168230/09 dated June 30,
2009 regarding empowering investors through transparency in payment of
commission and load structure.
2.
It has been represented to SEBI that distributors incur expenditure on
traveling and incidentals for reaching investors and procuring business for
Mutual Funds. Distributors are also required to set up appropriate
infrastructure for servicing investors as well as incur certain expenses while
marketing the units of Mutual Funds.
3.
In order to enable people with small saving potential and to increase reach of
Mutual Fund products in urban areas and smaller towns, it has been decided that
a transaction charge per subscription of `10,000/- and above be
allowed to be paid to the distributors of the Mutual Fund products from the
date of this circular. However, there shall be no transaction charges on direct
investments. The transaction charge shall be subject to the following:
i. For existing investors in a Mutual Fund,
the distributor may be paid ` 100/- as transaction
charge per subscription of ` 10,000/- and above.
ii. As an incentive to attract new investors,
the distributor may be paid ` 150/- as transaction
charge for a first time investor in Mutual Funds.
iii. The terms and conditions relating to
transaction charge shall be part of the application form in bold print.
iv. The transaction charge, if any, shall be
deducted by the AMC from the subscription amount and paid to the distributor;
and the balance shall be invested.
v. The statement of account shall clearly
state that the net investment as gross subscription less transaction charge and
give the number of units allotted against the net investment.
vi.
Distributors shall be able to choose to opt out of charging the transaction
charge. However, the ‘opt-out’ shall be at distributor level and not investor
level i.e. a distributor shall not charge one investor and choose not to charge
another investor.
vii. The AMCs shall be responsible for any
malpractice/mis-selling by the distributor while charging transaction costs.
viii. There shall be no transaction charge on
subscription below ` 10,000/-
ix. In case of SIPs, the transaction charge
shall be applicable only if the total commitment through SIPs amounts to ` 10,000/-
and above. In such cases the transaction charge shall be recovered in 3-4
installments.
x.
There shall be no transaction charge on transactions other than purchases/
subscriptions relating to new inflows.
4.
Mutual Funds shall institute systems to detect if a distributor is splitting
investments in order to enhance the amount of transaction charges and take
stringent action including recommendations to AMFI to take appropriate action.
5.
Mutual Funds/AMCs shall carry out an exercise of de-duplication of folios
across all Mutual Funds within a period of 6 months from the date of this
circular.
6.
It is also clarified that as per SEBI circular no. SEBI/IMD/CIR No. 4/
168230/09, dated June 30, 2009, upfront commission to distributors shall
continue to be paid by the investor directly to the distributor by a separate
cheque based on his assessment of various factors including the service
rendered by the distributor.
B.
Distributors of Mutual Fund products
1.
It has been felt that in the interest of investors there is a need to regulate
the distributors through AMCs by putting in place a due diligence process to be
conducted by AMCs as follows:
i.The due diligence process shall be initially
applicable for distributors satisfying one or more of the following criteria:
a. Multiple point presence (More than 20
locations)
b. AUM raised over ` 100
Crore across industry in the non institutional category but including high
networth individuals (HNIs)
c. Commission received of over ` 1
Crore p.a. across industry
d.
Commission received of over ` 50 Lakh from a single
Mutual Fund
ii.At the time of empanelling distributors
and during the period i.e. review process, Mutual Funds/AMCs shall undertake a
due diligence process to satisfy ‘fit and proper’ criteria that incorporate,
amongst others, the following factors:
a. Business model, experience and proficiency
in the business.
b. Record of regulatory / statutory levies,
fines and penalties, legal suits, customer compensations made; causes for these
and resultant corrective actions taken.
c. Review of associates and subsidiaries on
above factors.
d.
Organizational controls to ensure that the following processes are delinked
from sales and relationship management processes and personnel:
i.) Customer risk / investment objective
evaluation.
ii.)
MF scheme evaluation and defining its appropriateness to various customer risk
categories.
iii.In this respect, customer relationship
and transactions shall be categorized as:
a. Advisory – where a distributor represents
to offer advice while distributing the product, it will be subject to the principle
of ‘appropriateness’ of products to that customer category. Appropriateness is
defined as selling only that product categorization that is identified as best
suited for investors within a defined upper ceiling of risk appetite. No
exception shall be made.
b.
Execution Only – in case of transactions that are not booked as ‘advisory’, it
shall still require:
i.) The distributor has information to
believe that the transaction is not appropriate for the customer, a written
communication be made to the investor regarding the unsuitability of the
product. The communication shall have to be duly acknowledged and accepted by
investor.
ii.) A customer confirmation to the effect
that the transaction is ‘execution only’ notwithstanding the advice of
in-appropriateness from that distributor be obtained prior to the execution of
the transaction.
iii.)
That on all such ‘execution only’ transactions, the customer is not required to
pay the distributor anything other than the standard flat transaction charge,
as mentioned in part ‘A’ above.
c. There shall be no third categorization of
customer relationship / transaction.
d.
While selling Mutual Fund products of the distributors’
group/affiliate/associates, the distributor shall make disclosure to the
customer regarding the conflict of interest arising from the distributor
selling of such products.
iv.Compliance and risk management functions
of the distributor shall include review of defined management processes for:
a. The criteria to be used in review of
products and the periodicity of such review.
b. The factors to be included in determining
the risk appetite of the customer and the investment categorization and
periodicity of such review.
c. Review of transactions, exceptions
identification, escalation and resolution process by internal audit.
d. Recruitment, training, certification and
performance review of all personnel engaged in this business.
e. Customer on boarding and relationship
management process, servicing standards, enquiry / grievance handling
mechanism.
f. Internal / external audit processes, their
comments / observations as it relates to MF distribution business.
g.
Findings of ongoing review from sample survey of investors
2.
Mutual Funds/AMCs may implement additional measures as deemed appropriate to
help achieve greater investor protection.
C. Transparency of information
1. SEBI vide circular no. SEBI/IMD/CIR No. 4/
168230/09, dated June 5, 2000, has stipulated that only compounded annualized
yield shall be advertised if the scheme has been in existence for more than 1
year.
2. It has been decided, henceforth, that when
the scheme has been in existence for more than three years:
i.Point-to-point returns on a standard
investment of ` 10,000/- shall also be shown in addition to
CAGR for a scheme in order to provide ease of understanding to retail
investors.
ii.Performance advertisement shall be
provided since inception and for as many twelve month periods as possible for
the last 3 years, such periods being counted from the last day of the calendar
quarter preceding the date of advertisement, along with benchmark index
performance for the same periods.
3. Where scheme has been in existence for
more than one year but less than three years, performance advertisement of
scheme(s) shall be provided for as many as twelve month periods as possible,
such periods being counted from the last day of the calendar quarter preceding
the date of advertisement, alongwith benchmark index performance for the same
periods.
4. Where the scheme has been in existence for
less than one year, past performance shall not be provided.
5.
For the sake of standardization, a similar return in INR and by way of CAGR
must be shown for the following apart from the scheme benchmarks:
Scheme
Type
|
Benchmark
|
Equity
scheme
|
Sensex
or Nifty
|
long
term debt scheme
|
10
year dated GoI security
|
short-term
debt fund
|
1
year T-Bill
|
These disclosures shall
form a part of the Statement of Additional Information and all advertisements
of Mutual Funds.
6. Any disclosure regarding quarterly/half yearly/yearly
performance shall pertain to respective calendar quarterly/half
yearly/yearly only.
7. When the performance of
a particular Mutual Fund scheme is advertised, the advertisement shall also
include the performance data of all the other schemes managed by the fund
manager of that particular scheme.
In case the number of
schemes managed by a fund manager is more than six, then the AMC may disclose
the total number of schemes managed by that fund manager along with the
performance data of top 3 and bottom 3 schemes (in addition to the performance
data of the scheme for which the advertisement is being made) managed by that
fund manager in all performance related advertisement. However, in such cases
AMCs shall ensure that true and fair view of the performance of the fund
manager is communicated by providing additional disclosures, if required.
Assets
Under Management (AUM) disclosure
8. Wherever the Mutual
Funds discloses the AUM figures for the fund, disclosure on bifurcation of the
AUM into debt/equity/ balanced etc, and percentage of AUM by geography (i.e.
top 5 cities, next 10 cities, next 20 cities, next 75 cities and others). The
Mutual Funds shall disclose the aforesaid data on their respective websites
& to AMFI and AMFI shall disclose industry wide figures on its website.
Commission
disclosure
9. Mutual Funds / AMCs shall disclose on their respective websites
the total commission and expenses paid to distributors who satisfy one or more
of the following conditions with respect to non-institutional (retail and HNI )
investors
i.Multiple point of presence (More than 20 locations)
ii.AUM raised over ` 100 crore across industry in the non institutional category but
including high networth individuals (HNIs).
iii.Commission received of over ` 1 crore p.a. across industry
iv.Commission received of over ` 50 lakh from a single Mutual Fund/AMC.
10. Mutual Funds / AMCs shall also submit the above data to AMFI.
AMFI shall disclose the consolidated data in this regard on its website.
D. The aforesaid circulars
stand modified to the said extent.
E. This circular is issued
in exercise of powers conferred under Section 11 (1) of the Securities and
Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of
SEBI (Mutual Funds) Regulations, 1996, to protect the interests of investors in
securities and to promote the development of, and to regulate the securities
market.
Yours faithfully,
Asha
Shetty
Deputy General
Manager
Tel no.
022-26449258
Email-ashas@sebi.gov.in
